One way or another, all the uncertainty that has been generated by the Brexit process has to come to an end.
We’re not quite there yet, of course. Even the conclusion of the first stage of negotiations on the terms of the UK’s withdrawal from Europe is just the beginning of a process. If and when a deal is ratified by Parliament and the EU, a fresh set of talks on the trading relationship begins. No deal, on the other hand, confers a kind of clarity but no one really knows what the economic consequences will be.
But sooner or later the fog will clear, and at that point we should see a step change in the willingness of businesses both to raise capital and invest in their futures. At that point, access to capital will become crucial and it’s vital that SME businesses understand their options.
The Investment Climate
It would be wrong to say that investment has stalled – it hasn’t – but it is lower than it might be. Witness the latest Lloyds Bank, survey – released in October, 2018, – which found that the protracted talks on Britain’s EU exit was responsible for a 5% fall in business confidence to a level of 29%. According to Lloyds economist, Sharon Geoghegan, lower confidence had fed through to a reluctance on the part of many businesses to invest. There are many similar reports. Indeed, Bank of England governor Mark Carney has repeatedly said that uncertainty is holding back investment.
But there is a counter narrative – one that was coined by Chancellor Philip Hammond during his Autumn Budget speech. The Chancellor – perhaps buoyed by better than expected forecasts from the Office for Budget Responsibility – predicted that once a deal on Brexit had been concluded, there would be an economic dividend. And the hope among many is that more certainty will prompt businesses across all sectors to free up spending to drive the development of products, expansion into new markets and an increase in productivity.
That doesn’t necessarily mean that businesses will need to raise additional capital. One of the byproducts of both the great financial crash and the Brexit vote is that many companies have tended to hold back cash to create a hedge for a rainy day. Undoubtedly some of this cash will be allocated to growth-related projects.
Other businesses will need to raise capital, however – whether to create the headroom that will allow them to manage cash flow or to fund growth.
Access to Finance
The question is, when the dam breaks, will sufficient capital be available to meet demand?
Well, compare and contrast the today’s situation with the aftermath of the great financial crisis in 2007 and 2008.
A recent Bank of England working paper based on an analysis of 10,000 businesses finds that the financial crisis prompted businesses to reduce investment and hold onto cash. Arguably, this was a predictable and understandable reaction to the most difficult trading climate imaginable but it did result in lower productivity and a longer expected recovery.
But businesses that did want to raise cash also faced a huge challenge. Banks in particular became ever more reluctant to lend as they repaired their own balance sheets. So businesses faced a double whammy. They had to address the impact of the recession on their own trading prospects while also navigating a way through a radically changed corporate finance marketplace.
A New Ecosystem
Today things are different. One big difference is that we are not currently facing a recession. Equally, or perhaps more importantly, when businesses decide that the time is right to invest there is a much wider ecosystem of finance providers, many of them falling into the camp marked – rightly or wrongly – ‘non traditional’ or alternative.
In terms of alternative providers, there is now a broad range of platform lending and equity crowdfunding sites – some generalist, some specialist. If we look at the debt side of the equation, there are platforms specialising in property, term lending and invoice trading. And each platform has its own target audience. For instance, The Route – Finance focuses on special situations lending.
On the investment side, equity crowdfunding has become a first port of call for growth-oriented businesses seeking to not only secure capital but also raise their own profiles. However, that is only part of the picture. According to new figures from Dealroom.co, there is four times as much equity finance available for early stage companies today than in 2012. Meanwhile, new innovations, such as Initial Coin Offerings and (the closely related) Securitized Token investment are coming on stream. Based on blockchain technologies, these are providing new ways to raise capital, particularly in the tech sector.
Meanwhile, traditional lenders – notably banks – are continuing to play a hugely important role in supporting businesses.
All of this is good news for businesses – but it does create multiple choices. For instance, if a business owner is seeking to borrow, does he or see go first to the bank or to a platform lender? And if it is the latter, should it be a generalist P2P lender or something more like The Route’s Private Debt Platform?
That’s where finance brokers play a vital role, in understanding the new marketplace and helping businesses choose the right finance provider. Demand for capital is likely to rise as the current uncertainty clears. It’s important that everyone understands the whole range of available options.